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DOJ to Apple, Penguin and Macmillan: Couldn’t You Come Up With Any Non-Lame Arguments?

24 August 2012

Yesterday, the Department of Justice responded to various objections to the settlements it has reached with some of the Price-Fix Six (five large publishers plus Apple) over illegal ebook price-fixing agreements. It didn’t mince many words.

From the DOJ Memorandum:

A recurring theme in the various oppositions to entry of the consent decree is that the government fails to understand that the sale of e-books is unlike other businesses, and that the application here of long-settled prohibitions against price-fixing risks ruin for the industry. While e-books are a relatively new arrival on the publishing scene, a plea for special treatment under the antitrust laws is an old standby. Railroads, publishers, lawyers, construction engineers, health care providers, and oil companies are just some of the voices that have raised cries against “ruinous competition” over the decades. Time and time again the courts have rejected the invitation to exempt particular businesses from the reach of the Sherman Act.

. . . .

Suggestions that the antitrust laws are of no use when it comes to e-books are especially remarkable in light of the unmistakable consumer harm that resulted from the conspiracy in this case. The conspirators eliminated the “wretched $9.99 price” that so attracted the reading public and so infuriated publishers . . .  and made sure that Apple would not have to contend with what it viewed as senseless competition as it entered the e-book market. Now those conspirators that have not settled with the United States seek to upset the settlements that have been reached, and thereby delay the restoration of competition.

. . . .

In reality, what troubles Apple is that the decree returns pricing discretion not just to Apple, but also to its retail competitors — competitors which Apple fears may choose to exercise that restored authority in order to lower e-book prices. In that event, Apple’s e-book customers might find less expensive alternatives. Apple’s desire to avoid price competition for as long as possible is the unstated reason why it seeks to undo or forestall the settlements.

. . . .

Penguin directs the Court to certain commenters who, based on more limited information, make the incorrect assertion that the conspiracy lowered e-book prices. Penguin further sows confusion by only offering the Court price data for a period predating culmination of the conspiracy. . . . However, straightforward analysis of Penguin’s prices before and after conspiracy culmination reveals that Penguin did indeed raise its prices as soon as it gained the power to do so. In four weeks spanning the time when Penguin took retail pricing power from Amazon, the average price for a Penguin e-book sold through Amazon increased 17 percent, and the average price for a Penguin “new release” e-book sold through Amazon increased 21 percent.

. . . .

With respect to Macmillan’s fear that the settlement will make Amazon a stronger rival, as the United States previously noted, the Tunney Act is not a vehicle for firms to blunt competition. . . . “The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market.”

. . . .

The United States addresses the only new argument offered by [Barnes & Noble and the American Booksellers Association]: that the volume of comments opposed to entry of the decree demonstrates that it is not in the public interest. Simply put, the Court should reject the suggestion that the “public interest” is determined by the ability of interested parties to muster the largest number of comments in a Tunney Act proceeding. Certainly, it is not unprecedented for parties to oppose a settlement because they have a stake in an anticompetitive status quo.

. . . .

Here, as the United States previously has noted, the majority of the comments received opposing the decree did not come from those seeking to represent the public interest, but rather from those that benefited from the conspiracy and that have a vested interest in maintaining the status quo.

 

Here’s the complete filing:



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22 Comments to “DOJ to Apple, Penguin and Macmillan: Couldn’t You Come Up With Any Non-Lame Arguments?”

  1. Anything I’ve ever heard or experienced about how NY publishing conducts business leads me to believe that the Big Five couldn’t conspire their way out of a paper bag. That should have been defense enough alone.

  2. I’m really impressed with the writing in these DOJ memos: clear and concise, even witty.

    Love the bit about “just because you got more people to complain doesn’t mean you’re right.”

  3. I honestly am looking forward to whatever Scott Turow will have to say about this. It’s sure to be hilarious.

  4. PG, what would we do without you?? I hope you know how important you are to those of us fighting the Indie fight, with all of this information.

    And besides, your titles are AWESOME. This one is a treasure.

    In terms of the DOJ, I have to say, I’m pleasantly surprised. The United States Government has gone up a notch in my estimation due to their handling of this case. And who knew the DOJ could be so funny?

  5. Scott can’t answer right now, he is weeping quietly in his drink in a small out of the way Irish Pub.

    Seriously, I impressed with this document. On page 7/8 (11/12 on the reader screen) in the Macmillan section I was surprised to read that Macmillan tried to impress a increased emphasis on the ‘public standard’ angle by stating that e-distributors (quote) “serve as ‘gatekeeper’ over the dissemination of the ideas and information that are at the core of our free society.”

    In other words, how is the dissemination of the ideas and information that are at the ‘CORE of our free society’ served by having self proclaimed ‘gatekeepers’ (people who say ‘no you will read and buy what WE ALLOW in order to protect your freedom to read and buy freely?’

    If the spreading of ideas and info are at the core of a free society how is controlling that through gatekeepers (because everybody has their own biases and preferences) protecting such freedoms? gatekeeping = dissemination of ideas?

    That’s like saying “war is peace” and “slavery is freedom”

    shades of Orwell.

    A great time for authors and those who support them to be alive.

    • A great time for authors and those who support them to be alive. —–> (because such ideas are finally being exposed and bypassed via the new publishing paradigm).

  6. I second Mira’s sentiment. PG please keep it up and thank you much.

  7. Here’s something that is revealing about Apple. In Apple’s objections to the Proposed Final Judgement, they made a huge deal about how it would invalidate their contracts with the settling defendants and that, as a result, they were being punished even though they believed those contracts were valid. The DoJ points out that Apple forgot to mention that those contracts allow the settling publishers to withdraw any time they want to, given 30 days notice. Which, of course, means that Apple is suffering no harm whatsoever.

    Think about that for a minute. Apple knew that the judge has read those contracts. So, who were they trying to fool? The public. That’s pathetic.

    • Well, the settling publishers don’t want to withdraw, so they won’t give notice, so the contracts will have been invalidated by an outside force? *beth blinks her anime eyes, with sparkle in them*

      I really should have written to the DoJ myself. *sigh* “Please, don’t take the gun away from the big publishers! They keep shooting themselves in the foot with high prices, giving independent authors a wider range of prices to experiment with for finding the best balance between affordable and decent return. Let them keep the gun!”

  8. The DOJ memorandum is so clear, concise, and straightforward it’s hard to believe it’s the work of a government agency. How about that PG? Did they subcontract you to ghost write it? 🙂

  9. One thought I had as I read that document, which as many have said, is well written, documented and to the point. Unlike the complaints they have received.

    The argument that the book business is unique has some value to it. But not in the way that the publishers and Apple would interpret it.

    Unlike most manufacturing and retail environments, a publisher is a monopoly for a specific “item.” It would be the same as if only one manufacture built starters for cars. But instead of parts, what is unique is author and book titles. You can’t shop publishers for one specific book title, and if you want that specific title, there is only one publisher who has it. Not multiple publishers.

    So to give that one manufacturer pricing control over that one product is akin to saying if only one manufacture built starters, they were allowed to set the absolute retail price of starters, no matter what parts store they were being sold it. Effectively eliminating all competition.

    We wouldn’t allow that, as it would be breaking the antitrust laws by allowing a monopoly to price its products at will with no fear of competition. But that is exactly what agency pricing allows publishers to do, *because their business is unique*! If retailers are not allowed to compete on prices, then the publisher has an effective monopoly on a specific product and has opportunity to abuse it. And they have once through collusion they forced Amazon to accept its agency agreements.

    Because the book business is unique, I would suggest that agency pricing effectively sets up monopolies that can abuse their power and violate the law, even though currently they are said to be legal arrangements. Indeed, the moratorium on allowing agency pricing in the settlement is specifically because it was used to abuse the monopoly power they gained through it.

    Agency pricing I believe works fine in industries where there is competition among manufactures of a specific product. If both Penguin and Harper Collins could publish Stephen King’s, “The Stand,” for instance, then there would be competition in an agency pricing agreement. But because only one publisher can publish it, using agency pricing directly creates a monopoly of a specific title. Because unlike most other industries, it isn’t the physical object itself that defines a unique product, but the author and the title.

    If these people are not careful in trying to exempt book publishers from the Sherman Act because they are “unique,” they could have that unique quality used to bar them from ever using the agency pricing model unless more than one publisher publishes any one title.

    In the current market, while agency pricing isn’t illegal, it does create absolute monopolies for pricing and potential for abuse. Abuse it too much, and the DOJ may decide the book business is too unique to use the agency model at all. After all, as they stated, the act is to protect when the market fails to promote competition.

    • A monopoly for a specific item?
      Kinda like Apple has a monopoly of iPhones (and lookalikes?). 🙂
      Or FORD has a monopoly on Mustangs and Volkswagen on Beetles?
      Or Lucasfilm on STAR WARS narratives?
      Sorry, publishing isn’t all that different from other businesses as to be beyond the law.

      • You missed the point, Felix. They are not the same. And I was pointing out that the difference actually puts them in deeper with the law, not beyond it.

        Here’s the difference between what you are talking about. Let’s take Apple and iPhones. What the iPhone does, several companies make phones that do the same thing. The item you are selling is the phone, that does certain things. Sure, some want an iPhone because that’s what they want. That said, if for some reason Apple violates that customer, so that they no longer like Apple, they are not locked into buying an iPhone to meet their basic phone needs. My Android phone does just as well in making calls and running apps.

        But, you cannot go to any publisher you want and get the first Harry Potter novel. Only one. And if a publisher said, “Hey, we don’t have the Harry Potter novel, but we do have this story that is just as good…,” are you going to say, “Oh yeah, that is the same thing”?

        IOW, you won’t get that story anywhere else. No other publisher has it. Only one. One book does not give the same experience as another. And if you haven’t read Harry Potter, and you want that book, you have no choice but to pay whatever price the publisher decides to charge if they have total control over the price.

        I would say that is a monopoly. Contrast that with buying a Chevy, if a dealer didn’t have a Chevy, I would still be willing to consider a Ford or Toyota as long as it does efficiently what a car is supposed to do.

        Because of that difference, agency pricing effectively sets up the potential for monopoly abuse for a publisher because no other publisher can carry that title. And that is exactly what the DOJ is accusing the publishers did with their collusion, is to raise prices merely because they could.

    • Anyone with a patent or a copyright has a monopoly (at least until the patent or copyright expires, in some cases never). Ever ingested a newly patented pharmaceutical & noted the price tag?

      • Pharmaceuticals would be an example of a business more like books in that regard.

        However, copyright/ does in a sense create a monopoly for the creator, but whether the creator can abuse that monopoly by setting prices for it over any and every retail outlet, then you’ve abused that monopoly. As PG has stated before, a monopoly isn’t illegal, it is the abuse of the monopoly that is illegal. Agency pricing gave a monopoly, a publisher, the ability to abuse that monopoly by setting one price everyone had to charge. With only one source for the product and that source setting the price, and them raising it significantly over what the retailers were selling it for, they abused their monopoly.

        Whether the pharmaceuticals have done the same, is left to someone to make the suit and the case. Apparently the DOJ hasn’t found reason in the last several years. Speculation abounds as to why, maybe there is no case because of the research, maybe someone is getting paid off, maybe no one’s simply cared to look into it all this time. Who knows? But, do the pharmaceuticals set the final retail price at each pharmacy, or do they sell it wholesale? That’s the difference. If they sell wholesale, then they would have a hard time being accused of abusing their monopoly by squelching competition, as the publishers did.

        Bottom line, if the publishers had kept ebook prices reasonable once they gained control over them, maybe only going up a dollar or two at the most, the DOJ wouldn’t have a case. It’s the fact they raised the prices on their ebooks significantly that triggered the investigation and will cause the collusion argument to matter.

        • I know nothing about this, but as an example, Costco discounts pharmaceuticals far below in some cases what you can get at a regular pharmacy. Which looks to me like stores buy from pharmaceutical companies wholesale, and sell for whatever they please. Whether that original price is too high is another story.

  10. I love how they slap around Penguin over the argument that the DOJ had not proven that e-book prices had increased. The DOJ simply quoted the % increase of Penguins books and Penguin New Releases in the 4 weeks subsequent to signing the Agency deal.

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